The granting of up to five new digital bank licences in Singapore will increase competition within the sector, but is unlikely to threaten the dominance of DBS Bank, OCBC Bank and United Overseas Bank (UOB), said Fitch Ratings yesterday.
It said this is because the city state's largest banks have strong franchises and growing digital capabilities, and the regulator is also committed to preventing "value-destructive" competition, which will prevent the three incumbents' business volumes or profitability from being eroded significantly.
DBS, OCBC and UOB are all rated "AA-" with a stable outlook by Fitch and are also assigned viability ratings of "aa-".
The Monetary Authority of Singapore (MAS) is accepting applications for new digital bank licences until the end of this year.
It will announce in the middle of next year up to two digital full bank licences that allow access to retail deposits and up to three digital wholesale bank licences catering to SMEs (small and medium-sized enterprises) and other non-retail segments.
Ride-hailing firm Grab and Vertex-backed peer-to-peer lender Validus Capital have publicly indicated their interest in applying for the licence. Besides local names, European digital bank start-ups such as Revolut, as well as Ping An Insurance Company of China's fintech arm OneConnect, are expected to be taking a closer look.
The MAS' objective is to liberalise the banking industry, although it has made clear that digital banks must not engage in "value-destructive" behaviour to gain market share.
The digital banks' activities will be subject to regulatory restrictions - for instance, an aggregate deposit cap of $50 million and individual depositor cap of $75,000 - until they are well established. This is meant to mitigate the risks of untested business models on Singapore's long-term financial stability.
Digital full banks will have to meet the same capital and liquidity requirements as existing local banks, as well as the same consumer lending rules, such as limits on unsecured credit extended and loan-to-value ratios for mortgages.
"We expect the new entrants to increase competition in lending, particularly to more digital-savvy retail and SME customers, despite the regulatory restrictions," Fitch said yesterday.
Such greater competition in the lending market will benefit customers, but it could increase risk for banks if they relax their underwriting standards or under-price risk in an attempt to capture or defend market share, it added.
"However, we believe that DBS, OCBC and UOB will remain disciplined, and they are also well placed to compete digitally, having invested significantly in their digital capabilities in recent years - a trend we expect to continue as the market evolves," it said.
The digital banks will also increase pricing competition for deposits as they become more established and seek to develop their funding bases.
But Fitch does not expect the increased deposit competition to pose a material threat to the leading incumbents, as it will take time for newcomers to build trust with customers and capture a meaningful amount of core deposits.
The new licences look set to create new partnership opportunities between banks, non-bank financial institutions, fintechs and large corporations.
The Business Times reported last week that new entrants are toying with ideas of a consortium with other non-banking players and traditional lenders.
With Singtel already signalling interest publicly, its peer M1 - which is part of the Keppel conglomerate - has left the door open to the option. Other names bandied about include property firms and utilities providers, which are unusual parties to digital banking partnerships, The Business Times understands.